How to use credit wisely

A few months ago we discussed why investors should use credit and how successful investors have used maximum leverage as a wealth creation tool and that they understand how everyone else subsidises their borrowings.

Over the next few editions we’ll explore exactly how credit is subsidised.

The first subsidy to investors comes from people who deposit money in the bank. I still don’t know why anyone would leave money in the bank as an “investment”. It would have to be one of the worst investments known to man. Not only are you paid a dismal rate of return, you are taxed by the government for up to half of the dismal return you receive.

Imagine if all depositors refused to put their money in the bank unless they received 8% per annum return. Interest rates would go up significantly and harm investors’ wealth generating ability. Fortunately there are people who are willing to put their money into the banks and financial institutions at the insulting rates of interest they are paid. It allows borrowers to use their money cheaply to generate wealth.

In the next two months we’ll explain how low level borrowers and the taxpayer subsidises investors.